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Economics Exam Questions - Investment Decision, Multiplier Effect, Bond Auction, and More

## Investment Decision (9 points)

1. Investment Decision (9 points)

Suppose a business owner is trying to decide whether to invest in a new piece of machinery. The machine costs \$300,000, and it is expected to generate revenue of \$400,000.

Complete all two parts (a-b).

a. Solve for the expected rate of return on this machine.
b.If the interest rate the business owner has to pay is 30%, will the business owner buy this machine?

2. Multiplier Effect (15 points) Complete part a.

a. During a recessionary gap, is the goal to increase or decrease the equilibrium GDP?  Will the change in spending be greater than, less than, or equal to the  change in the equilibrium GDP?

Complete either parts b, c, and d OR parts e, f, and g.

b. In a given economy with an MPC of 0.8, the equilibrium GDP equals \$850,000. If G increases by \$25000, solve for the new equilibrium GDP that will result.

c. In a given economy, with an equilibrium GDP of \$600,000 both government purchases and taxes increase by \$60,000.  Solve for the new equilibrium GDP that will result from these two changes.

d. What is the relationship between the multiplier and the MPC?

e. In a given economy with an MPC of 0.8, the equilibrium GDP equals \$620,000 and the potential GDP equals \$750,000.  How much would G have to change in  order to close the recessionary gap?

f. What will the numerical value for the balanced budget multiplier always be?

g. If real GDP is greater than the aggregate expenditures, what should be done to production to get them to equal one another? Will savings or Ig be greater in this case?

3. Impact on Equilibrium GDP (8 points)

For each situation listed below, state whether the change will cause U.S. aggregate expenditures, and therefore equilibrium GDP, to increase or decrease and explain why it will either increase or decrease.

Complete all two parts (a-b).

a. Increased disposable incomes for Americans, as reflected by the increased hourly wages reported upon in the November 2021 Employment Report, while foreign incomes do not change.

b. Inflation in the United States that is greater than inflation in other nations.

4. Bond Auction (13 points)

The Treasury Department is currently holding an open auction on bonds.  Each bond has a face value of \$2,500,000.

Complete all three parts (a-c).

## Multiplier Effect (15 points)

a. Suppose you pay \$2,300,000 for the bond at auction.  Solve for the interest rate you receive on this bond.  Round to four decimal places (otherwise, you will lose  credit).

b. What is the relationship between bond prices and the corresponding interest rate?

c. In order to encourage an increased number of bonds to be sold, the interest rate on the bond should increase.  What impact will this increased interest rate, resulting from the increased number of bonds to finance government spending have on the aggregate expenditures?  What is the name of the effect that arises in this situation?

5. Economic Expenditures (35 points)

Disposable Income=GDP    Consumption       Ig             G              X            M
\$320000                                 \$340000        \$6000     \$12000     \$8000     \$32000
\$360000                                \$370000         \$6000     \$12000     \$8000     \$36000
\$400000                                \$400000         \$6000     \$12000     \$8000     \$40000
\$440000                                \$430000         \$6000     \$12000     \$8000     \$44000
\$480000                                \$460000         \$6000     \$12000     \$8000     \$48000

Complete all seven parts (a-g).

a. Solve for net exports and aggregate expenditures at every level of GDP and determine the equilibrium level of GDP.
b. If potential GDP equals \$500,000, based upon the equilibrium GDP value from part a, solve for the size of the recessionary gap.
c. If taxes =0.02Y, where Y represents GDP, solve for the cyclical budget deficit.
d. Suppose that government purchases increase by \$28000 in each row, meaning that they will now equal \$40000.  Solve for the new equilibrium GDP that will result from this government purchases change.
e. Would this decision to raise government spending be a decision more likely to be made by a Classical economist, or a Keynesian economist?
f. Solve for the actual multiplier based upon the information provided throughout this problem.
g. Solve for the simple multiplier based upon the information provided throughout this problem.

6. Aggregate Supply and Aggregate Demand (14 points)

Price        Real GDP Supplied    Real GDP Demanded
\$  600             5000                     21000
\$1200           10000                     18000
\$1800           15000                     15000
\$2400           15000                     12000

Complete parts a, b, and c.

a. Plot the aggregate supply and aggregate demand curves on the same graph.
b. State the equilibrium real GDP and price level.
c. At the equilibrium GDP from part b, is the economy experiencing a recessionary gap?  Explain why it is or is not experiencing a recessionary gap.

d. State what happens to the nominal wages and the real wage in the long-run phase of the aggregate supply.
e. Show how the current supply chain issues throughout the world will affect the graph drawn in part a.  Label what you drew as E.  Is this an example of cost-push inflation or demand-pull inflation?

7. Monetary Policy (6 points)

Complete all two parts (a-b).

a. Name the most common tool of the three of monetary policy.
b. As covered in the notes, what two things is the FOMC of the Federal Reserve planning to do to deal with the higher inflation rates?

8 More test (3 points):

a. The number of jobs gained in the United States in November 2021 was ________.
b.The unemployment rate in November 2021 was _________________________%.
c.The revised estimate for GDP growth, released at the end of November, revealed that GDP for the third quarter of 2021